Good morning, everybody. Colin Hunt here, CEO of AIB. We are pleased to report another quarter of progress on the implementation of our strategy to 2023. The group is performing well against the backdrop of an improving domestic economy and a positive growth outlook, notwithstanding geopolitical tensions and building inflation pressures. Our pipeline business remains strong, and we are pleased to lift our income guidance for the full year. Our balance sheet is now growing in scale and health, with performing loans up by EUR 400 million, while NPEs are down to 5.1% of gross loans, the lowest level in absolute and relative terms since the onset of the global financial crisis 14 years ago. Our income line is moving in the right direction and cost discipline remains a feature, with underlying costs down 2% Q1 2022 over Q1 2021.
Meanwhile, our T plan to take out EUR 230 million costs by end 2023 is on track. We remain confident about our about our ability to deliver a ROTE greater than 9% in 2023, in line with our strategic targets. We're also pleased with our ongoing progress on our inorganic initiatives with CCPC approval received for the corporate and commercial loan book acquisition from Ulster and exclusivity secured for the Ulster Bank tracker mortgage loan book. We have set out a very clear strategy of building an evermore resilient and sustainable AIB with a complete, competitive, and comprehensive product suite. With every single passing quarter, we are delivering on that strategic ambition. I'll stop there now, and we'll open for questions.
Thank you, dear participants. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone keypad. The first question comes from the line of Rahul Sinha from JP Morgan. Please ask the question.
Good morning, Colin. Good morning, all. Two questions from me, if I can. Firstly, I was just hoping if you could unpick a little bit the NII upgrade for us. What is your thinking around the organic NII this year versus your previous expectations of it being stable? Related to that, I guess, you know, what's driving the change in the rate sensitivity, any color if you could share around the deposit beta and changes in assumptions there. And then I've got a second one on the Ulster tracker book. We clearly see the benefits of deploying your excess liquidity and capital here, but I'm just wondering how we should think about the P&L and return impact of this acquisition, maybe upfront and over time. Thanks so much.
Good morning, Rahul. I'll answer the second question, then I'll hand to Donal for the honors maths question, the first question. On the Ulster Bank tracker book, like when it became clear that NatWest Group had made the strategic decision to exit the Republic of Ireland market, we set ourselves the task of securing two parts of that business. One was the commercial and corporate and commercial loan book. That's done, closed, CCPC approval received. The second was the tracker mortgage book. We took a very commercial approach to the tracker mortgage book. It is a passive book compared to the very active book in terms of the corporate and commercial book.
The deal that we did, we wouldn't have done if it didn't make commercial sense, purely commercial sense from our perspective. That means it had to make our task of getting a RoTE above 9% easier, so it had to be accretive to the group's RoTE target. We haven't concluded the transaction yet. I do expect that, I'm hopeful that we will close the transaction in reasonably short order. When we do close it, we will share an array of financial metrics with you. I'm not, at this juncture, going to go further than saying that the deal that is on the table, which is not yet signed, is one that is accretive to our medium-term RoTE target.
Yeah, I mean, just to perhaps help you a bit more on the trackers trying to, you know, define some parameters. You know, we want to disclose that the quantum is around EUR 6 billion. You know, risk weightings for tracker mortgages in the Irish system are, you know, around 45%. You know, although the deal isn't concluded, it's more likely than not that we would look to manage this if successful on an outsourced basis, just given the requirement that all of the existing borrower T&Cs maintain and, like, would be retained in place. It's unlikely, if successful, that we would onboard this. The costs of an outsourced construct will be around 30 basis points.
That should, you know, help you get some metrics around that. Like Colin said, you know, overall just focused all the time on this being accretive to our RoTE targets. That's on that. With respect to the NII, you know, for the year-end results giving guidance for 2022, you know, the main uncertainty that existed was where interest rates were gonna land in the main currencies. Just particularly around the time of doing results, things were really bouncing around quite a bit.
You know, I took a conservative stance to, you know, anchor our guidance on where, you know, spot rates really were at the time, like, fully in the knowledge that they were quite conservative. Also we didn't have, you know, a firm date on when the Ulster loans were gonna be on board. Now we know when we'll be able to begin onboarding the Ulster loans. That's gonna be before, you know, the end of the first half of the year. You know, we'll be front-loading larger assets and larger connections at the beginning throughout the year.
I think that if I was to break out the NII uplifts, you know, around 50% will be due to Ulster Bank interest income, and around 50% will be related to interest rates. Now, to talk to the interest rates, you know, obviously I've disclosed this table around sensitivities for the last couple of quarters. You will note from December to March, in particular, the euro sensitivities have just changed.
Yeah.
This isn't due to any heroic assumptions. We haven't actually changed any of our modeled assumptions. You know, we're being consistent. It's just one of the main assumptions made in our interest rate risk in the banking book IRRBB is the behavior between official rates, call that ECB rates, and market rates, call that Euribors. Obviously for year-end, I used a negative curve, whereas for March I used revised interest rate curves. When you look at the balance sheet through that differentiated curve, it creates different sensitivities due to the assumptions we make around ECB rates and Euribors and behavior between those. I didn't make any modeled assumptions around pass-through rates.
I would say for 2022, the rate benefits that we expect to realize are predominantly gonna be in the non-euro currencies. You know, obviously markets are pricing in lift off in euro rates from probably July. There will be a benefit coming in in Q3, Q4, but euros is really to my mind gonna be a big 2023 story. I hope that is clear.
Thanks so much both.
Thank you.
Thank you. The next question comes from the line of John Cronin from Goodbody. Please ask your question.
Good morning, Colin. Good morning, Donal. Actually, most of my questions have been asked, so just some follow-ups on those. In relation to the timing of the Ulster Bank acquisitions or the corporate and commercial loans.
Yeah.
Is there any more color you can give in relation to how that might kind of graduate over the course of the year? If they begin at the end of H1, you know, how should we think about it in terms of quarter three and quarter four in terms of how much would come on? Then separately on the tracker mortgage book, if you're in exclusivity now, if you were to close this transaction, what would be your kind of best-case expectations now around timing? Just to confirm, presumably none of that is in collaboration with AIB.
Yeah. Okay. Yeah, on the corporate and commercial, we will bring over the facilities, the customers and the staff on a tranched basis. We will have probably something of the order of about 10 different tranches as that migration happens. That's to ensure an orderly and seamless process for customers and for indeed Ulster Bank employees who are going to be joining AIB Group. It is likely that that process will start before the end of June. We will probably see the bulk of the value transferring in Q3.
Certainly we will have the great majority of the value of the portfolio complete before the end of the year, but it will be into 2023 before we conclude that migration process. The bulk of the value will be in this year before year-end. On the trackers, as I said, our intention is to conclude on this in reasonably short order, and we would be planning to bring those assets onto the balance sheet before—like in either very late Q3 or early Q4.
Okay. For sure. Thank you.
Thank you. The next question comes from the line of Christopher Cant from Autonomous. Please ask your question.
Good morning, both. Thanks for taking my question. I just wanted to come back on Ulster. In terms of how you think about pricing this, and I appreciate we should get details or full details in due course.
Yeah.
In terms of how you think about pricing this transaction and it helping you to deliver your RoTE target, what's the counterfactual you're thinking of for these assets? Is it just holding surplus liquidity? I'm just trying to think about how you think conceptually about pricing the asset. Because I guess, you know, if we go back to what you might have been thinking about or having these discussions initially with NatWest, the outlook for rates was quite different, and excess liquidity would've been a drag. Swapping that out for some productive assets or non-negative rate bearing assets might look rather different to the scenario we're now in. I'm just curious to understand what your counterfactual is when you're pricing those assets, please.
In terms of the growth piece, I'm just trying to think about the final comment in your RNS this morning, the high single-digit growth for this year. Obviously that now includes Ulster. Is the underlying growth expectation still sort of 3% this year for the existing business pre-M&A, or has there been a small change there? Thank you.
Hi, Chris. Good morning. You know, the Tracker book and the way we were looking at that, clearly, you know, as rates move and expectations in the market move, you know, you kind of get more or less comfortable with buying a book like this. The loan loss experience is very low on Trackers. So it's like a fixed income transaction, which to some respects can depend on your interest rate view. But you know, notwithstanding the fact we always looked at this from a less strategic perspective, okay? It was more transactional, okay? For transactional activity, you know, I think it needs to be demonstrably additional or accretive to our ROTE target.
You know, obviously as time has gone by, you know, the risk of euro rates going lower has dissipated. We were always pretty consistent in our pricing construct. Yeah, just generally on anything that we look at from an inorganic perspective, you know, the lens we look at to see if this makes ultimate sense is, you know, if we use the capital here to do like a share buyback, which one is more accretive? We use that nearly as a backstop. We try to solve for that as well. I mean, we'll see what happens with the Tracker book. You know, if we're successful, we're certainly very, very interested in it.
You know, in a rising rate environment, you know, who knows, we could be dealing with a different set of pay down assumptions in Tracker worlds. You know, still we feel that the portfolio makes sense for us for a lot of reasons. I think as I mentioned previously, the fact that we will manage this on an outsource basis doesn't put additional strain on the organization for any other activities that we are looking to do. With respect to the growth question and the NII question, sorry, one of my colleagues here is texting me. I didn't answer one of Rahul's questions, which was, you know, what's the underlying interest income like. That is very much in line with what we would have guided.
The reason the underlying NII pre-rates, pre-Ulster is very much online is because our growth expectations are very much in line. We've said that we wanted to do EUR 13 billion pre-Ulster and 3% net, and I would say the first quarter of the year was very strong, and that's, you know, a continuation of what we saw at the end of last year. The areas where we're seeing the growth are those areas that were strong at the end of 2021. Corporate business, very strong. Real estate business, particularly anything to do with housing, very strong. You know, the mortgage business this time last year, I think our market share was kind of mid-20s%.
Now we're up at 32%-33%, you know, and growing in a market that's growing. You know, we really feel that there's good momentum there. Yeah.
On a commercial basis, the Tracker transaction stands up. It makes absolute commercial sense for us. There is an added benefit to this, which is that we are going to be welcoming a not insignificant number of customers to AIB Group.
Thank you. Can I just follow up? On the comment around the mortgage market share picking up.
Mm-hmm.
I guess an ancillary question to that would be, have you seen a change in behavior from the departing banks in terms of the level of competition for new business, or is that still to come?
Well, I suppose, Chris, we obviously have full visibility in relation to our own pipeline, our own market share in terms of the volume of applications we see coming through, the volume of approvals that are going through our system, and our market share there, and then of course, ultimately our drawdowns. It is the drawdowns that we report. We were pointing to a significant improvement in the mortgage market performance, I think when we did the full year numbers. We can see the pipeline coming at us. What I can say is that we continue to be very satisfied with where we stand in the market at the moment. It is a rising market.
We're seeing continuing upgrades in terms of expectations on the size of the market this year. I think the Goodbody Stockbrokers have a number of EUR 12 billion for the market size this year. I can confirm that what we're seeing coming through in our pipeline is very reassuring in relation to where we're going to end this year on market share.
Thank you.
Thank you. The next question comes from line of Aman Rakkar from Barclays. Please ask the question.
Good morning, Colin. Good morning, Donal.
Thank you, Aman.
Two questions from me. One was around the buyback announcement today. This kind of parallel, open market, purchase alongside the directed buyback. It does sound like based on your daily liquidity, like you would potentially execute that quite quickly. I mean, is there any chance for an additional announcement at the interim if say you did actually get through that transaction, or should we really be looking at a twelve monthly cadence on capital return announcements? Would be my first question. The second was just around cost of living concerns in your markets. How are you trying to navigate this and be safer about the credits that you're picking?
I guess I'd be interested for your thoughts as to whether you think you know, is this cost of living squeeze a headwind or a tailwind to credit formation? Is it that actually credit could be part of the answer to smoothing the gap between kind of consumption and income, or should we be thinking about you know, lower activity, lower credit? Thank you.
Hi, Aman, Donal here. On the buyback, obviously we had approval at the time we did our year-end results. You know, it was always our preference to look at a directed buyback given the uncertainty in the market. You know, I can understand that, you know, that our main shareholder, you know, wasn't really sure where markets were going. We concluded and agreed a construct which we've kind of lifted and dropped from some of the other experiences that we've seen around Europe.
You know, we very much and neither did our main shareholder want to be in a position, you know, whereby, you know, financially, you know, we were incentivized to, you know, to go onto the market. At the same time, that would lead to our main shareholder's holding increasing. I think we've come to a really good position here working with the government, whereby we'll be able to do both. You know, we'll be able to execute our buyback as approved and ensure that the government shareholding doesn't increase. I think that was you know well worth the time and effort. I think then your question around capital returns links to that.
You know, previously, you know, I alluded to the fact that it was gonna be hard for me to give a really concrete overview on capital returns until I knew what the full 2022 capital story was gonna look like. In some ways I was alluding to the fact that, you know, M&A within the Irish market hadn't in fact really concluded. You know, obviously one large block of assets which still were looking for a home was the Ulster Tracker portfolio. I think we're getting a bit closer on that. I think I would remain consistent with the position that I wanna just get full visibility on what the balance sheet and capital is gonna look like for 2022. Then in 2023 and 2024 from 2023's results start driving towards that medium term target.
Look, all the while, I would say that through growth and through movements in interest rates, I think the capital return outlook is already becoming quite a bit clearer. You know, as the year goes by, I would be able to draw out a lot more clearly a roadmap around capital returns for shareholders, which is always very top of our mind. For us, the buyback was important, okay? Getting the approval, getting the agreement, getting the construct. We're in the market this morning. It's up and running. You know, in the coming years, I think you can reasonably expect that that will be the route that we will go to as our preference for surplus capital returns.
Yeah.
Just in relation to the cost of living issue. Obviously all credit, large or small, takes into account the impact of stresses in terms of income and cash flows, either at household level or business level. We are very comfortable with the underlying quality of the loan book as it stands. You know, the Irish economy is not going to grow at the rate in real terms that we might have thought at the start of the year, but the primary reason for that downgrade is the impact on confidence levels of Russia's invasion of Ukraine. We're still talking about growth this year of the order of 5% in real terms.
There's still very, very strong momentum in the economy, and we're seeing that in our business. You know, the domestic economy here, notwithstanding what we're seeing in terms of confidence impact, notwithstanding what we're seeing in terms of higher inflation pressure across the economy, the underlying activity and underlying momentum in the domestic economy here is very robust. In terms of our own response, recognizing the significant increase in inflation pressures and the very, very low probability that this is a transitory phenomenon, we have agreed a three-year pay deal with our trade union, which is out to ballot, I understand, at the moment.
That will see us and our staff having certainty in relation to pay over the course, not of the next year, but over the course of the next three years. We won't be back in negotiations on pay until 2025. That's for a 4% pay increase this year and 3% in 2023 and in 2024.
Thank you. The next question comes from the line of Borja Ramirez from Citi. Please ask your question.
Hello. Good morning, and thank you very much for taking my questions. I have two quick questions, if I may. First is regarding the asset repricing. I would like to kindly check, particularly for the mortgage book, what is the expected duration of the repricing. From the time that we see the increase in the underlying rates to the time that it feeds into the NII. My second question would be, given your significant improvement in profitability, I would like to kindly check if this could allow for a better usage of the deferred tax assets and maybe an improved capital generation in the coming quarters.
Thank you.
Hi. Thanks very much, Borja. I mean, the way I would have laid out, you know, the balance sheet and how we look at interest rate risk for the year-end would really be to split it between official rates, market rates, and managed rates. I think when I show a sensitivity table like I have today, and I have shown what, specifically the euro impact is, I can reconcile that number there almost entirely to externally observable rates, okay. That being ECB depo, ECB Refi, Euribors, okay. I think the question that you've asked me there on asset repricing, it's that falls within our managed rate portfolios. I tend not to disclose discrete asset or liability pricing strategies because, you know, obviously they go hand in hand.
You know, we have a negative interest rate strategy in place. There's a rising interest rate environment, you know, so you would reasonably expect, you know, short duration fixed rate mortgage pricing to change. You know, there will be a point at which variable rate mortgages begin to move as well, you know, particularly as we look forward. I think it's too early to probably get too invested in what our pricing decisions could be in 2023, 'cause that's quite a way off.
I would give you the certainty to say that if you just monitor external markets, have your own view on where euro rates are gonna be, and if you look on our table, you can see what the annualized impact of that is gonna be. Like I said, that is 100% reconcilable, I would say. Because the managed rate portfolios, assets, liabilities, we try to manage that at least to flat on a zero basis, which is always gonna incorporate all of the assets and liabilities where we have, let's say, discretionary pricing power. That's on the asset repricing. Then with respect to deferred tax asset, a couple of things.
You know, needless to say, as we upgrade income guidance, that's gonna be more positive for DTA usage, particularly in Republic of Ireland. I think as you look outwards, 2023, 2024, depending on your interest rate outlook, you know, obviously DTA benefits will improve. Albeit DTA usage percentage is likely just to remain the same.
Thank you.
Thank you.
Thank you. The next question comes from the line of Diarmaid Sheridan from Davy. Please ask your question.
Good morning. Thank you for taking my questions.
Morning, Diarmaid Sheridan.
Two if I may, please. Firstly, just on the rate sensitivity, and thank you for the update on that. It's very useful. If we think about it more broadly in terms of profitability and returns, I suppose, how should we think about the drop-through from NII when we do begin to see rates increase? You know, I think maybe my second question will be on cost, so maybe we skip to the impairment line. You know, do you expect to see much reaction on the impairment line, as rates go up from here? And secondly, just on the cost, just get a quick comment from you. Obviously, you've agreed a new pay deal. You're reiterating your cost guidance. Is there more work to get to the cost guidance?
No.
Do you think that's very much in line with the guidance you provided at full year? Thank you.
I'll take the cost one, and just in relation to the underwriting standards are fundamentally different today than what they were 15 years ago. Every single time that we choose to put our capital out the door to support our customers, we are conducting a very thorough and stressed underwriting analysis in relation to each of those facilities. We already have
Analyzed the ability of our borrowers to repay the facilities to terms in a rising and higher interest rate environment. I'm very conscious of the fact that I think market is assuming about three-quarters of a percentage rate increase this year and 100 basis points next year, and that is certainly well within the parameters of the stressed underwriting scenarios that we lend against. Very comfortable with that. In relation to the cost guidance, we remain very much committed to the EUR 1.475, less than EUR 1.475. It's a really important discipline for the management team of the group as well.
This is a commitment that we have externalized, that we're deadly serious about, that we built a path to, when we reviewed the business in the approach to the announcement of our refresh strategy at the end of December 2020. It does take into account some of the inorganics that we've announced. We remain very, very much focused on it. The increases in wage inflation that we announced earlier this week are not inconsistent with us continuing to target that very, very important number.
Yeah. Just with respect to what amount of the rate benefit should pass through. I think a couple of things. If you look at the NII over the last three or four years, you can see that what interest rates have done on the way down. I think you can reasonably imagine, given our positioning, that we will be able to bank the largest part of those moves. Obviously, the cost challenge within Ireland will remain to be a challenge.
We're really focused on ensuring that we execute on our cost plans and ensure that we onboard all of the inorganics as soon as we can and as safely as we can.
Yeah. I think, Diarmaid, we'd like. You know, when we outlined the strategy, we said we had a Transformation Programme to take out EUR 230 million in costs. That was built on a line-by-line basis across the group. It's something we're continuing to manage. It's something we're continuing to target. We're not yet halfway through the implementation of the strategy, but very, very happy with how that is unfolding in terms of our underlying cost base. You may be aware, maybe you're not, that we're having our AGM this morning, in less than an hour's time, so I think we're going to draw a halt to the questions at this juncture. We look forward to engaging with you over the coming days and weeks.
Thank you very much indeed for your time, attendance, and questions this morning, and I hope you have a very good day. Thank you.
That concludes our conference for today. Thank you for participating. You may all disconnect. Have a nice day.